Fed to Test Bank Tool to Attract Deposits, Soak Up Cash

The Federal Reserve will soon begin testing a new tool to soak up vast sums of money it injected into the economy to stem the financial crisis.

The Fed said Monday it will offer the equivalent of five small certificates of deposit for banks, beginning as early as mid-June.

A trial run of the so-called "term deposit program" is intended to give banks a chance to learn how the program works. Once the economy is on firmer footing, the term deposits program will be one of the Fed's tools for tightening credit.

The term deposits will pay interest and provide banks with an incentive to keep their money at the Fed. Otherwise, circulating it through lending could cause higher inflation.

In an effort to combat the financial crisis and stimulate the economy, the Fed cut a key short-term interest rate to a record-low rate of nearly zero. It also pumped about $1.5 trillion of extra funds into the financial system.

The central bank now faces the difficult task of unwinding all that support. If it moves too fast it could push up rates too quickly and slow the recovery. But if it moves too slowly, the low rates and extra money in the system could spur inflation.

The Fed said the development of the program has "no implication" for when it might choose to raise rates.

The term deposits will be structured as fixed-rate instruments with maturities of 84 days or less, the Fed said.

The goal of the initial offerings is to test the program, the Fed said, and to give banks a chance to learn how it works.